Insulet Corp (PODD) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Insulet Corporation fourth quarter and full year earnings conference call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the call over to Mr. Duane DeSisto, President and CEO of Insulet Corporation. Please proceed, sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss our results from the fourth quarter and full year 2008, a year of major achievement for Insulet .

With me today is Carsten Boess who, effective Monday, will move into a new role leading our international expansion efforts. And I am also pleased to welcome and introduce Brian Roberts, our new CRO, who is with us on today's call. We will be making forward-looking statements about various aspects of our business.

Please refer to our most recent SEC filings, including the Company's first, second and third quarter 2008 10Q's and the Company's 10Ks for the year ended December 31, 2007 for a full discussion of our risk factors. Since its introduction, the OmniPod insulin management system has changed the way thousands of people live with type one diabetes. It has helped free them of the logistical and technical challenges that prevented so many people with diabetes from choosing the best possible treatment for their disease and living their lives to the fullest. While we knew the innovation behind the OmniPod system could revolutionize insulin pump therapy, we also knew that this would not happen overnight. We would need to develop an organization specifically designed to support this innovative product across four major fronts.

First, we would build a manufacturing capacity necessary to produce the OmniPod efficiently and cost effectively. Second, we would build a sophisticated commercial organization able to work with the diabetes community to increase awareness and simplify user adoption. Third, we would provide the medical community with evidence demonstrating the OmniPod's clinical advantages over conventional pumps. And fourth, we would prove to our shareholders that over time we will be able to build a strong profitable business.

I am pleased to say in 2008 we made substantial progress on all these fronts and that we are well positioned for continued improvement in 2009. Using this frame work, let me take a couple of minutes to recap our progress over the past year and then provide you a look ahead to what we believe will be an exciting 2009. At this time a year ago our growth constrained by our manufacturing capacity. We were producing about 70,000 pods per month at approximately $40 per pod, from our facility here in Massachusetts. Now, we are consistently producing nearly 200,000 pods per month at less than $25 per pod in our partner Flextronics facility in China.

In fact, the transition to China completed in fourth quarter has exceeded our expectations as we now believe that the potential capacity in a manufacturing line is between 300,000 and 350,000 pods per month, more than a 50% increase from our initial thoughts. Our increased production capacity in China is the key reason for the $8.2 million write down of our manufacturing equipment in Bedford.

Insulet now manufactures more insulin pumps in one month than all other insulin pump producers in the world combined make in a year. We are also focused on improving our efficiencies and further delivering on the economies of scale inherent in our manufacturing process. We believe that we will continue to drive down production costs as volumes increase. We expect the cost per pod to continue to decrease to the range of $15 to $20 by the second half of the year. Over the coming year, we are looking forward to the release of our next generation PDM. Further, we will continue to invest in the research and development of our next generation pod, as well as a version of our PDM, which integrated with our partner's products,will provide continuous glucose monitoring. We anticipate being into the FDA for the integrated OmniPod system with CGM in 2009.

Second, with the additional manufacturing capacity we expanded our commercial footprint. In the first few months of 2008 we tripled our sales force to nearly 50 territory managers and began selling the OmniPod nationwide, which allowed us to break through the milestone of our 10 thousandth patient using the OmniPod Insulin management system. We also added the critical infrastructure such as certified diabetes educators and customer care specialists needed to support our efforts to increase awareness in adoption of the OmniPod across the diabetes community, from doctor to educator to patient.

Recently, we added our customers' voices to the dialogue promoting OmniPod with an OmniPod video contest. We invited customers to create videos explaining how the product has made diabetes a smaller part of their lives. Our customers shared stories about all the things in their lives they never thought they could do with a pump. The best thing we heard over and over again was how the OmniPod just lets them be themselves. You can view the prize winning video on myOmnipod. com and see many other OmniPod stories on YouTube. As we move into 2009, our focus in the US is to improve the productivity of our sales force, driving the cost of acquisition down and increasing our market share.

We continue to advance the conversation with the medical community about the merits of the OmniPod system. Working together with key opinion leaders around the world in the field of diabetes, we commenced multiple studies aimed at demonstrating OmniPod's clinical superiority over conventional pumps and broadening its potential field of use. In 2008, several important studies were initiated or completed. At the annual meeting of the Diabetes Technology Society, Dr. Howard Zisser of Samsung Diabetes Research Group presented his research on the effect of hydrostatic pressure on expected insulin delivery rates. The study found that the OmniPod with its tubing-free design delivers more accurate doses of insulin than traditional pumps, whose pumping rates can be impacted by how they're placed on the body relative to their tubing.

This is important for people with type one diabetes, because increase variations in insulin delivery make it impossible to consistently control blood glucose values which is critically important for proper diabetes management. This hydrostatic pressure study, combined with Dr. Zisser's user evaluation study as well as his previously published disconnect study, provides a compelling base of evidence demonstrating the OmniPod's clinical differentiation. Last week at the ATD conference in Athens, Greece, several JDRF artificial pancreas project researchers presented the latest findings from their studies using the OmniPod.

The innovative, easy to use OmniPod system continues to be utilized in a majority of the artificial pancreas study sites which are being run by the World's leading diabetes researchers.

We are also very excited to be supporting the first investigator initiated clinical trial of the OmniPod system in patients with type two diabetes. This study uses OmniPod to deliver concentrated U-500 insulin to type two patients is being conducted by Dr. Wendy Lane at the Mount Diabetes and Endocrine Center in Ashville, North Carolina. This trial completed enrollment in the third quarter 2008 and is on track to be completed this year.

We have further studies planned for 2009 and believe that collectively, the clinical evidence will ultimately demonstrate the clinical differentiation of the OmniPod system over conventional insulin pumps. We will also continue to pursue other opportunities to utilize the OmniPod outside of diabetes.

Last year we signed our first non-diabetes drug delivery agreement with Ferring Pharmaceuticals and earlier this year signed an agreement with another party to evaluate delivery of one or their significant drugs. We believe there are many other opportunities for us to expand the use of the OmniPod beyond the diabetes industry.

Collectively, our 2008 accomplishments in manufacturing, sales and marketing, and clinical research have started to show results financially. Revenue increased by 170% as compared to 2007, reflecting the progress made with doctors, patients and managed care plans, The fourth quarter marked the first period in Company history with a positive gross profit, demonstrating the progress in manufacturing the pod in a cost- effective manner. We were also able to reduce our cash burn from $25 million in the third quarter to $17 million in the fourth quarter. Additionally, we have successfully completed our first year of Sarbanes-Oxley Section 404 compliance with no significant issues.

Turning to the current year, while we remain optimistic about our ability to continue growing in 2009 , we would be remiss if we did not consider the potential impact of the economy on our business. While we believe that the OmniPod provides diabetes patients with the best product on the market, we are aware that fear of unemployment and subsequent loss of insurance coverage may increase attrition and/or cause some customers to delay their decisions to switch from competitors products or multiple daily insulin injections. As a result of this increased uncertainty, for the full year 2009 we are significantly broadening the range of our revenue guidance.

We are estimating revenue to be in the range of $55 million to $65 million for the full year 2009. The Company expects its 2009 operating loss to be in the range of $50 million to $60 million. In regards to cash, we continue to focus on reducing our cash burn and will adapt down our expenses as necessary to drive down our use of cash. As a result, we believe that we have sufficient cash to get through 2009. However, we are also continuing to explore various alternatives to further fund the business and strengthen our balance sheet.

Finally, I also want to again welcome Brian Roberts as Insulet's new CFO. Brian brings proven leadership in strategic planning and building strong financial operations for high growth companies. His track record as a financial executive focused on working capital and profitability will be a tremendous asset to Insulet as we continue to grow.

As Carsten's new role signals, we believe there is a significant opportunity for OmniPod outside the US. As most of you are aware, Carsten spent many years in Novo Nordisk, serving in strategic financial and operational roles in Europe, Asia, North America and South America. His extensive experience abroad ,particularly in the European diabetes market, makes him uniquely qualified to lead our expansion into key markets across the globe. We anticipate receiving CE Mark approval this year and will launch the OmniPod in key European markets thereafter. We also plan to lay the groundwork for expansion into other key diabetes markets including Canada, Asia and South America, to capture revenue opportunities in 2010 and beyond.

With that, I will turn the call over to Carsten to review the financials in

Thank you Duane. The fourth quarter 2008 sales increased 172% year-over-year to $11.9 million. Compared to $4.4 million in the fourth quarter of 2007. On a sequential basis, revenue increased 17% compared to third quarter of 2008. Fourth quarter revenue included approximately $1.2 million, in compensation from Abbott diabetes care for customer service activities in connection with sales of PDMs with an Abbott glucose meter in it. Short-term deferred revenue at the end of 2008 totaled $2.4 million, up from $1.4 million at the end of 2007 and $2.3 million in the third quarter of 2008.

We are very pleased to report our first quarter gross profit in the fourth quarter 2008. Gross profit was $1.2 million or positive 10%, as compared to a gross loss of %2.3 million, or minus 53% in the fourth quarter of 2007, and a gross loss or $.1 million or minus 1% in the third quarter of 2008. A key initiative for Insulet is to drive down our production cost for OmniPod. We have significant leverage in our financial model as higher volumes and lower production costs in China drives economies of scale. Reflecting this leverage from the fourth quarter 2007 to the fourth quarter 2008, revenue increased 172%, while in the same period our cost of revenue increased only 60%.

Operating expenses were $28.6 million in the fourth quarter 2008, up from $13.7 million in the fourth quarter of 2007, and $19.8 million in the third quarter of 2008. This increase was impacted by the recording of a nonrecurring restructuring charge of $8.2 million related to the Company's transition of its manufacturing activities to China. The restructuring charge is comprised of the $7.4 million non-cash write down of manufacturing equipment at our Bedford headquarters and a $7.8 million in severance related expenses. The remaining increase in operating expenses was mostly due to the significant expansion of the Company's sales organization and infrastructure during the year. Sequentially, excluding nonrecurring restructuring charges, the underlying operating expenses stayed relatively flat in the fourth quarter.

We reported a net loss $23.8 million for the fourth quarter of 2008, compared with a net loss of $15.7 million for the fourth quarter of 2007. And net loss of $20.8 million for the third quarter of this year. Again, if we adjust for the nonrecurring restructuring items, the net loss was lower in the fourth quarter, versus the third quarter of 2008.

As of December, 31, 2008, Insulet's cash and cash equivalents totaled $56.7 million, compared to $94.6 million at December 31, 2007. We reduced our quarterly cash burn in the fourth quarter of 2008 by $7.5 million dollars, compared to the third quarter of 2008. For the full year 2008 sales increased to $36.1 million compared to $13.4 million in 2007, representing a 170% increase in annual revenue. Net loss for the year was $92.8 million, compared to a net loss of $53.5 million for 2007. Gross loss for 2008 was $4.6 million, minus 13% as compared to gross loss of $12.4 million, minus 92% in 2007.

Operating expenses for 2008 increased to $84.8 million from $41.5 million in 2007, primarily driven by increased SG&A expenses related to the significant expansion of the Company's sales organization and infrastructure during the year and the fourth quarter restructuring charge of $8.2 million.

As Duane mentioned, we have successfully completed our first year of testing and compliance with Section 404 of Sarbanes-Oxley with no significant issues.

In summary, we are pleased to continue the strong growth in our top line, to have reported the first quarter of gross profit in Insulet's history, to continue the trend of reducing quarterly cash burn, to continue to reduce our quarterly net operating losses, to continue to focus on reducing operating cost levels, and we believe we have significant opportunities to make our organization more efficient and further demonstrate the leverage in our business model in 2009. Now, I will turn the call back to Duane.

Thank you Carsten. In summary, our 2008 accomplishments have established a strong commercial and operational foundation for the OmniPod system. As we enter 2009, we remain focused on expanding sales of the OmniPod system in the US , which will continue to be our most important market.

To complement this growth, we will lay the foundation to begin generating sales in new geographies and from new applications in the future. We realize in improving our top line and thus driving more volume is the best way for us to continue pushing towards profitability. That said, we will also continue to push towards increased sufficiencies in order to drive down our cash burn and improve our margins.

While we are mindful of today's economic realities, we believe our achievements in 2008 leave us well positioned to continue to grow the market and capture future opportunities for the OmniPod system in 2009 and beyond. With that, Operator, we will open it up for

(Operator Instructions) Questions will be taken in the order received. Your first question comes from the line of Michael Weinstein with JPMorgan. Please proceed.

Thank you. Good afternoon. First question is, I don't believe I caught an update on it. If you did, my apologies. But you talked on the last call about potentially monetizing some of your working capital. And you thought you would have an update for us on this call. I was wondering if you could provide that. If you did, I apologize.

No problem, Mike. This is Duane. We have a few proposals in hand. We continue -- we are reviewing them, and like we told everyone, I think -- we think we have some real assets,we have the ability to monetize here, so that's our first approach to the forward looking cash -- cash opportunity for us. We do not have anything to the point yet where we would be willing to disclose any of it. But like I said, we do have several proposals that we are in fact reviewing.

What should we assume on timing there?

Well, our hope here is that we get through this process in the next -- my guess is probably sometime in the early in the next quarter here we will have that all put to bed. I think from our standpoint, we don't have an immediate rush. We want to make sure we get it right.

We are spending time, we're talking to a lot of people and we're negotiating hard. The thing I can tell you, though, is there is interest, there is money out there, it comes in all shapes and sizes as you well know, and we're trying to figure out what's the best strategy for the Company.

After beyond the monetization option, what option -- with your forecasting for your burn rate over the course of this year, you would need some additional cash at some point certainly in 2010, what would be plan b or step b, if you would, to keep the Company going forward?

Mike, I know this is going to sound evasive, I think the next step for us is we'd like to get this behind us, so that way we can quantify if and how much we are looking for. The second thing is, and I think one of the things with Carsten being involved now internationally, there is interest internationally, about possibilities maybe being able to monetize some of this potential opportunity on a worldwide basis which would not go down the traditional kind of you raise stock for equity. So I think we have options, I think it's too early to tell where we are vis-a-vis other than trying to monetize the assets that we currently have. But we do think there is opportunities outside diabetes and we think there is potential opportunities -- potential distribution rights outside of the US force.

Let me just turn a bit more to the fundamentals. You talked about a few different items, one would I'm interested in how your ASP's are holding up for the pod. Two, could you talk about reimbursement and maybe just give us a broad update on where reimbursement stands in different geographies and the progress we are making there. Within the context of reimbursement, you obviously have a lot of challenges in 2008 with your organization and your strategy behind reimbursements, if you could just talk about where you are at this point on having the full team in place and being able to do that internally.

Sure. I think first question vis-a-vis the whole pricing, keep in mind a lot of these contracts we put in place for two or three years,so there is very little impact in the pricing. We always been $28, $29, between 28 and $29 per pod, depending on what the mix is that goes out any given month. I think we are still in very good shape there. Virtually nothing in terms of erosion there. I think vis-a-vis, the managed care organization, I think we are in very good shape there. Like I said , you take a look at a couple of the key distributors we picked up have access to the bigger plans we weren't able to get to, so we've put that in place. So we think we feel very good about that.

The one thing like I said and I think we mentioned on a previous call, what we are seeing and we deferred south revenue in the fourth quarter, I mean, we are seeing some payers that are struggling a little bit, as you can imagine if you kind of take a look in middle of the country here, I don't want to call any of them out. But if you take a look in the middle of the country where unemployment is going up dramatically, there are some payers that are struggling there, and we did in fact defer the revenue this quarter. So we are paying very, very close attention to that potential as it goes forward. So I think we haven't seen a spike in attrition because of unemployment yet, but we've never seen 10% unemployment before either. We are trying to dial all those things in as we look.

But I think from our standpoint we feel good about the managed care plans we have, we have access to most of them in the country now. We haven't seen the immediate price erosion, but we are -- like I said, there are a couple of plans that are struggling. Not just with us, but with everybody doing business with

Let me -- bring it back, when I think about your 2009 guidance you gave, I don't believe you gave individual maybe assumptions for new patient adds. Do you want to make sure we are on the same page there, maybe within the context of that, is your view that at this point that the principal obstacle to your growth is no longer internal is no longer your infrastructure, it's really just the demand for the product at this point in time?

I tell you, I think, from a standpoint looking at 2009, I think the leaping off point for anyone looking at this, if you start with about 10,000 people in the stall base, you can look at various scenarios vis-a-vis attrition, and our attrition still running around 10% so we haven't seen that, but the same thing. You can model it out any which way but you have the starting point of approximately 10,000 patients there which is a good spot to start. You can model in the attrition, and then you can dial it up, you can dial it up and down. Our plans for 2009, we are going to continue to attack the marketplace with virtually the same size sales force we have. We don't think we maxed that out. We think internally, I will knock wood here, there is no downside , there is only upside in terms of the back office and the other things we are doing.

We made progress in fourth quarter, we are happy with the Management Team we have over there now in that area for us. We think there is potential upside, but let me put it this way, I feel much, much better and I don't think there is a lot of potential downside to what we now have. It took us awhile to get it right but I think we got it right

Thank you, Carsten. Thank you, Duane, sorry.

Your next question comes from the line of Mimi Pham with JMP Securities.

Good evening, I guess if we took the 2,200 patients adds you had for fourth quarter and kept that straight through 2009, that would get us up to the top end of your guidance for the year. Are you saying that in your view, given what you are seeing so far in January and February, the best you think you can do for this year?

No, Mimi, we are going into a point -- I'll give you a couple of data points. We are going into a year with unprecedented unemployment, you're talking about the Big Three automobile makers possibly going under. There is a lot of stuff going on that I'd love to tell you I've got a great handle on. If I really did, I would be doing something else for a living. So we wanted to make sure -- and we've run all kind of models vis-a-vis potential attrition rates, potential new people coming in, and at the end of the day we think we understand sensitivity internally. So we just wanted to make sure we had a big enough margin, because our other assumption is, as unforgiving as the markets are, the last thing in the world we want to do is come out there and not be within the range we gave you. We gave you a large range, we understand it's a large range. I think that reflects the uncertainty we are seeing. Having said that, January is always the worst month we ever have. January was a slow month. It's always been the worst month we ever have, every year. February has kind of picked back up.

Where we sit today which is the first week of March, December is vis-a-vis kind of the revenue, where we are coming out, that's starting to feel like where we may come out in Q1. We've got to wait and see. We've got to wait and see the next few weeks here. But we always start the year, January is always the slowest month of the year. Then it starts picking up.

We are trying to track where we started, how fast we are picking up and are we going to see any effects of the economy here. Hopefully that answered your question.

I guess what you are saying is maybe for first quarter this year it would be something looking like the 2,200 you did for fourth quarter, but then it could, based on what's happening in the economy decline in terms of new patient adds from that 2200 level for the back half of the year.

I'm just looking at it in -- you know what, it has the possibility. Could it be lower? Yes, it could be lower. What we are trying to do, I'd love to be able to pinpoint the number here. And we have a lot of things going on. But like I said, January is always the slowest month.

The other thing we don't have the advantage of, this quarter last year we didn't have all these salespeople in place. You can run the models a couple of different ways, you can straightline it, you can impact a bunch of different things here. Like I said, I think the broad range reflects -- we are trying to reflect what is going on outside this building on a macrolevel that we really, really can't control.

Okay. Then for fourth quarter, excluding that special charge, your operating spend was $20.4 million. Can you give us the sort of the range of operating spend embedded in your '09 guidance on a quarterly basis? Is it going to be something south?

I first want to say that our fourth quarter -- this is Carsten-- fourth quarter operational spent level was at the level of the third quarter and we will take a very close look in 2009 to drive additional efficiency in that cost structure, meaning there is a decrease built into the guidance we will look through at materializing as we move through the year and as we move through the quarters.

Okay. Then on your next generation PDM, did you give us an exact timing for that? And is this something that is also being communicated to patients now that there is a PDM coming such that they will have the option to upgrade in the future? Or are you not mentioning it when you --

For the most part we are not mentioning it, and the reason for that is we'e got to get this thing through the FDA. With the change in the government down there, that process is not as predictable as once it was. So we are hoping to get it out ASAP, because for those of you who have had the opportunity to see it in one of the meetings we've been to we think it's more robust, has the color screen, it has feature set. We've taken a lot of input from patients, so we are excited about it. We just have to get -- really not -- it has very little to do with us internally, a lot more just to get through the process.

But the filing has been submitted already?

Yes.

You're just waiting for it?

From us -- there is little that we can do to expedite that from our side.

Last question. Sorry -- last question on the -- again, with the timing of your 2009 integrated system, are you talking about 2009 for both the Abbott and Dexcom product --

That would be our hope. We know for sure we will be in with one of them. Our hope would be we could get both of them there, but at a minimum we are hopeful -- we know we should have at least one of them in there.

They are the ones handling the PMA -- which would be a PMA submission, correct?

Our goal is this would be a PMA supplement, yes.

Okay. Thank you very much.

Thank you.

Your next question comes from line of Bruce Cranna with Leerink Swann.

Good afternoon, guys. Duane, kind of curious, your comments in the script about cost per pod this year. It sounded like you were saying something like $15 to $20, sometime maybe mid year. I seem to recall the target was really $15 per pod sort of first half or maybe mid year '09. Is something slipping there?

Bruce, I think, a , like I said last year we got burned by that $2 battery, so we just want to make sure it's a big enough range - b, we're shipping out of inventory at the moment. Then we are going to have that kind of shut down with Flex, which that date hasn't been completely firmed up. And then we will make the step up again here, so we are going to ship out of inventory. So some of the lower cost product coming out of Flex we won't see until the back half of this year.

Then the other thing obviously is tied to volume. If you remember where we've been is at about 300,000 pods per month we given the range of $15 to $18 which is really the key driver in that. I don't think -- if you got the impression we are trying to change something, I don't think that's the case. We are just trying to dial in the inventory we have and how that peels out into the

Sounded a little more cautious to me. When do you -- so you're burning through Bedford inventory still, and that should be done kind of mid year?

A lot of the Bedford stuff should be out of here hopefully this quarter.

On Flex itself, I know they've been struggling with the slowdown like everyone else in the world, but can you comment perhaps on I guess their shape, and whether or not you look at them today as a better partner, if they are in fact slightly weakened, or potentially a worse partner for you?

I think from our standpoint they become a much, much better partner because they have intimate knowledge of the product. We've done a lot of things together, we continue to grow. They are involved with us in our next generation product to help make it more efficiently. Having said that, I don't think there is a single guy in the manufacturing business that we are doing business with that when you look at the stock price and balance sheet doesn't look significantly weaker than it did a year ago.

From our standpoint, they continue to make improvements, continue to help us, so we've got a great relationship with them so that's terrific. If you're talking about the macro, how they look like, I would tell you we got a whole list of suppliers that kind of look the same.

Lastly, can you give us a sense -- and maybe I'll throw this Carsten's way -- exactly what your job will be, Carsten, and I guess what I'm trying to get at is given what I would think is a fairly substantial US opportunity, your deploying assets in EU at this time seems maybe -- well, questionable I would say, given your shortage of capital. Maybe Carsten or Wayne or both, maybe kind of go through your thought process there.

I will start it and then I'll turn it over to Carsten. I think the view from the Company is we are not looking at putting millions of dollars of assets in the international opportunity. And I think just -- I will take a step back here just to get everybody comfortable. When we started taking a hard look at this about the middle of the year and what the potential opportunity was on a international basis,I think we talked to a lot of you individually. I mean, our view is kind of a distributed model. That's how we should build the business and as our margins continue to improve, we start creating some room here by the back half of this year, where we could dial in distributors, so very low cost to enter the market, we would be looking at bigger players and I will let Carson go through that.

And just so everybody is comfortable here, Carsten at that point in time really became intrigued with this, hounded me to death that if the opportunity became real. he wanted that opportunity. So and I think from my standpoint, he understands our product intimately, her understands the European markets intimately, he understands distribution and he understand the Company's financial position.

With that, I will kick it over to him, but just to give everyone a little bit of a comfort factor that at the end of the day, I think with Carson and Brian, we are a much, much stronger Company than we would have been any other way we pulled this off. So with that, Carsten.

Yes, the first thing I want to say is I'm very excited about the opportunity. It was clear as we moved through the particular second half of 2008, that an anchor was needed for the international activities because in a Company growing as fast as us focusing on one country when you are trying to then focus the organization towards international, you want to make sure you have the various aspects pulled together. So I'm very excited about the opportunity. I look upon myself as the anchor for that building a potential infrastructure and that infrastructure will not be a cost heavy infrastructure. It will be an infrastructure that will be built on distributorships around the globe.

The exciting piece is that we actually will have CE Mark to Mark over the next one to two to three months. and based on that .we will get the product in shape to predominantly focus on the big pump markets in Europe, Germany and France as a first step. Overall. I look forward to getting into an operational role and build on top of 16 years in the financial area.

Thank you.

Your next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed.

Good afternoon, guys. Wanted to understand, what was the churn rate in the quarter?

You mean the attrition rate?

Yes.

It was like I said about 10%.

Okay. You guys are steadily seeing acceleration in the new user additions but your guidance suggests you see it flattening out. Do you think it's flattening out in the first half of the year or is it just economic standpoint, what kind of clarity do you have?

Look, you know, I think from our standpoint we don't have clarity, that's kind of why we built this range, I mean, like I said, I think from our standpoint January is always the slowest month, we felt February was starting to come back, look normal, and March is picking up a little speed here. So we are still excited about this. But when you start looking at -- give us some sense -- we deferred in the fourth quarter $1.5 million dollars worth of revenue because we have managed care plans that have been paying us before that are struggling to pay. And I won't get into specifics, to me, that's the macro thing that I'm looking at here that I really can't control, right?

And so what we want to do -- what we want to do is be sufficiently cautious, to give you some sense. We are still very, very excited -- we are talking about a down economy, we are talking about possibly greater than 10% unemployment across the country and we're talking about growing 50% to 80%, there is very little in there for international because most of that is going to start taking place back in the year.

So we are still very bullish, but y like I said, to give you sense, I mean I think Q4 in Carsten's area I think was $1.5 million worth of revenue deferred because we are worried about the payers, and that's not individual people, that's kind of big names that if I told you, you would be a little bit surprised. But it's becoming -- it may become a reality that ripples through. And I think it would be totally imprudent on our part if we didn't try to build that in, we are not trying to signal we are seeing a slowdown in the business.

We are trying to signal we are about to enter a space here that we haven't seen, and the first sign we've seen in the fourth quarter wasn't a lack of patience, wasn't a step up in the attrition, but it was couple of guys really, really struggling to pay. We've had the meetings with them, we understand their situation. It doesn't do us a hell of a lot of good. And we are trying to work our way through it. You ripple that across the country, there is a lot of pieces there I cannot control. It has less to do with the product and more to do with where we happen to be in 2009.

Okay. A couple of housekeeping questions, what was the difference between switchers and insulin injections and what was your CapEx for the quarter?

We,,l I will give you the switchers, the mix is now about 70/30. So we picked up a few more switchers. We were traditionally running about 75/25, the mix is closer to 70/30. And with the CapEx, Carsten?

End of third quarter of '08 our CapEx was $9.4 million, and in the fourth quarter it is $10 million. So $.6 million was CapEx in the fourth quarter.

Have you guys completed your CapEx requirements? We won't see any cash go towards that?

You know, I think to say we won't see any cash go towards that is incorrect. You have tools that wear out over time. But it will not be a significant number, it will not be a significantly number in '09 by any stretch of the imagination. Nothing compared to what we spent in '08.

Your next question comes from the line of William Plovanic with Canaccord Adams.

Good evening. A couple of clarification questions. One, the attrition rate about 10%, is it increasing or decreasing?

It's around 10%, it was up slightly, but we are talking fractions that were percents, so I don't know. But it was up slightly.

Then, just wanted to make sure I got this correct. Abbott was a $1.2 million in the quarter or for the year?

$1.2 million for the quarter.

Okay. Then, clarification on the pumps, I believe originally you thought 200,000 a month, if you're doing 200,000 out of China, are you doing it at $15 to $18 per unit?

No, I think, Bill,l we have to be around 300,000 to get to that price out of China.

You need to be 300,000 to get to $15 to $18.

Yes. That's really kind of where it sits.

Is that because of material costs or because, from my understanding, so you purchase all the components and then Flex actually assembles everything, correct?

The driver in terms of that delta has to do with a combination of material costs being the predominant driver, and then slightly higher than anticipated warranty as for the scrap cost. That's the answer to that.

Okay. And at 350,000, what do you think you get to per pod?

I think as we start approaching between 300,000 and 400,000--

The next step we taken in terms of communication is 400,000 to 600,000 pods, so we keep approaching the range there, and we will start to approach $12 dollar cost.

Okay, a simple question, as you exited '08, what was your cost per unit? Manufacturing.

The cost per unit between $20 and $25. It was north of $25, reiterate the progress here, as Duane said, in his script by the beginning of 08 it was approximately $40 by the beginning of 07 it was $75, since the IPO we taken approximately $50, cost out per pod and as I indicated we will continue that 300,000 towards the quarter 600,000 production monthly levels as well.

In your -- and I'm flipping back and forth -- but on attrition rate, basically from your commentary, do you feel that that could increase just because of the macroeconomic environment?

We have run a bunch of scenarios, that's one that we've actually dialed in. By saying, okay, what happens if people don't have the money. Haven't seen it. Like I say, the thing we have seen which is probably a bit scarier than people dropping off the product, was actually seeing a couple of managed care plans come back and want to go through a payment plan with us.

But we did run those scenarios, we said that's a possibility if you don't have the money, If you don't have the money, the most cost affective thing you could possibly do, it's not the best treatment, but the most cost affective thing you could do is go back to shots, right? Or I mean, that's where you could end up if you don't have the money.

Okay.

So we dialed those in.

Then your net loss was $20 million in the quarter ex the one-time stuff. How did you only burn $17 million in cash? Because we don't have a full balance sheet, so I'm just curious.

That's a combination of three factors, and l related to the balance sheet. And number one is the significant lower CapEx number.

Number two, is that you remember in Q3 we built up significant inventory. We did not actually inventory in terms of dollar, stayed flat in the fourth quarter. And then number three is that we also worked off our payables, and don't forget the fourth factor from the P&L that our contribution in terms of bottom line in fourth quarter versus third quarter from a cash perspective was approximately improvement of $1 million. So there you have the items.

What's your CapEx for ' 09 expected?

Significantly less than the $10 million, down in the low single digits.

Couple of million bucks?

No I would say $3 million to $5 million.

$3 million to $5 million, okay. Then three last questions, one -- two of them are combined. The DTC and trialing spending, have you scaled that back, and what was that in the quarter?

On the sampling side, remember the progress we made there the first two quarters we spent -- of 2008 we spent $2.5 million in each quarter on sampling. We took that down to $1.4 million in the third quarter. We have taken it further down to $1 million in the fourth quarter. So that should add up to approximately $7.4 million. We also taken steps to make sure we improve our RTC spend, although we continue to see nice ROI on our DTC investment in terms of leads generation.

What's that running per quarter at this point?

Think the metric I can give is that at this point in time, since the commencement of it we have generated in excess of 25,000 leads.

Okay. Okay, so you're not going to tell us how much you are spending. Then the last question, I promise, is for '09 you have now given guidance, who set that guidance, was it Robert , Carsten, Duane? Who controlled that and who takes ownership of

At the end of the day it's me. This is Duane. At the end of the day it's me. At the end of the day Carsten is still here, you know, Brian is here. So we have been through it all as a team but at the end of the day ultimately it's me.

Did Robert have a significant hand in helping with that or is he just on board?

It's Brian, but yes. He is -- let's put it this way don't have to worry about a call when you get on in the first quarter and he blames it all on -- he may blame it on me but he is actively involved in everything we are doing and he reviewed all the metrics, yes. Great, thank you.

Your next question comes from the line of Shawn Fitz with Stephens Incorporated.

Just a handful of follow ups,please. Just a little housekeeping item here, could you provide us the inventory numbers and the finished goods number, please?

In terms of dollar, the number of inventory was $16.9 million. And of that $12.3 million was the finished goods inventory.

Great. As you think about when the manufacturing gets turned back on, my note as you exited the second -- as you entered the second half of 2008 and the end of 2008 you were manufacturing above end market demand, as a cautionary strategy. When manufacturing comes back on, will you guys be manufacturing to end market demand or will you continue to over-manufacture?

The plan right now that we build is we want to have two months of worth of inventory -- finished goods inventory on the balance sheet , so we are going to manufacture to the demand. Then just to refresh everyone's memory, sometime in the middle of this year here, Flex is moving everything into one facility, so there is going to be a shut down period,so that's why we carrying more than that. We think once they get to it over to this new facility we will be in good position, we have a great deal of confidence in them , so we will round two months worth of

Then Duane, you said the goal is to get to two months of inventory. Right now where do you feel like you are, and then kind of what are the underlying assumptions in that number in terms of number of units per month per patient.

I think right now we're running about 3.5 months worth of inventory slightly north of that.

What is the assumption in terms of the number of units per patient per month on that Duane?

I think if you look at the product being used every three days, that's kind of how it works. Do the math, it's 10, per month per patient. With a little bit of excess. But not much.

Great. Just one last question, as we think about the guidance for the year, could you provide some details maybe in terms of the assumptions as it relates to rep productivity and, specifically, patient adds per rep.

I think, and I don't know who brought it up, maybe it was Mimi. But I think if you take the scenario and kind of flatline kind of what we did in Q4 this year, you come out towards the middle, middle top end of the range, and I think if you start putting in different numbers you will come out obviously closer to the bottom range, and you can tweak the attrition. I kind of think if we just flatline the productivity, you end up, like I said, middle towards top end of the range.

Great, Carsten and Duane, thanks.

Your next question comes from the line of Matthew O'Brian with William Blair.

Best of luck to Carsten. I jumped on a bit lat so II apologize if you covered this, but you mentioned the $1.5 million in deferred revenue in the quarter, can we assume that was just lost patients.

What it basically is the way the accounting works is we've shipped product, we've had to flush the cost of that product through the cost of goods sold because there is some doubt about collectibility.

What happens is we had to defer the revenue, this isn't kind of like traditional Joe Smith is not paying, this is a major health care is expressing some concerns about how they can pay us. What happens is we ship the product, we have not recognized the revenue. We'll probably end up recognizing revenue for some of this on a cash basis or if one of these plans gets straightened and out and starts paying we can probably flip it. But that's really - $1.5 million of that is product we shipped. There's patients on it. And the managed care plans are struggling to pay us.

Any sense for how many patients would have been new patients you may have lost in the quarter?

Well, you know, I think the attrition rate has been about 10%.

Referring to that $1.5 million in deferred revenue, was that coming from newer patients or from existing patients.

Typically -- this was -- both. It was both. Because a couple of plans were people that used to pay us and all the sudden we've seen a blip and it really has to do with the macroeconomy, it has nothing to do with us, it has to do with the macroeconomy. In that case, it may have both.

Typically what will happen is we will get a contract, we'll ship a few patients to get a trial, get them through the whole process until we collect the money, so we are comfortable that we have it all right, then we will start consistently shipping.

And then as far as Q4 goes, I understand that the reverse in processing has been an issue, and it sounds like it's gotten a little bit better, but was the quarter better because of better processing? You know, as far as working out some of the backlog or has that backlog actually grown or can you give us a sense of referrals, did it increase Q4 over Q3r?

I think from a referral standpoint, I think what you see in terms of new patients hired, with new patients put on, which is about a 10% increase, I think that also is pretty indicative of kind of the referral business also.

And then one last one and this probably more suited towards Rob Campbell and his team, but can you let us know what is going on in the drug delivery side? There has been a lot of people calling. Has that increased, decreased, is the number of companies in the queue that you are working with growing? Is it falling, where does that stand. Where is the tipping point where we start to see some more of these deals kind of drop? This year, next year?

Kind of give you a quick update, like I said, the Ferring product, hopefully, will be out, and in the fourth quarter this year, we'll actually hopefully -- we'll start recognizing some revenue with that. We have signed another agreement. I'm not at liberty to discuss with whom, but it's a drug that's approved for a major illness, so it has the potential if it all works out. So we are in the process of doing some tweaking on the PDM and we are going to do some testing with that, so we are pretty excited about that. Because of the nature of the agreement we have, I can't give you any details. We went to our first drug delivery and have several leads we are following -- one of these conventions they have on actual drug delivery, John [Gareboto] is heading that up for us. Remember, John was the Co-Founder of the Company, he is -- let's put it this way, we think there is enough there that John is now spending almost 100% of his time focused on that particular aspect of the business.

I will tell you once again, that process is a learning curve for us, it's significantly longer but we now have one which we think we will be able to commercialize this year. We have a second that we are doing some studies with the particular drug and the great part about the second one is, it is an approved drug. So it's a new delivery mechanism, but it is an approved drug.

Thank you.

Ladies and gentlemen, that is all the time we have for questions today. I would like to turn the call over to Mr. Duane DeSisto for closing remarks.

Thank you, everyone. We are very, very excited about where we are as a Company. We understand 2009 on a macro basis will present challenges. I think with the Management Team we have in place, we are going to be very well equipped to handle all that, and I look forward to updating you in the future. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.